Press Release No. 12/194

Press Release No. 12/194
May 29, 2012

A team from the International Monetary Fund visited Kiev during May 21–28, 2012 to hold discussions for the 2012 Article IV consultation. The team met with Prime Minister Azarov, National Bank of Ukraine Governor Arbuzov, Minister of Finance Kolobov, other senior officials, and representatives from the private sector and civil society. At the conclusion of the visit, the mission chief Mr. Chris Jarvis issued the following statement:

“The government and the National Bank of Ukraine have made progress in their efforts to support economic stability. We welcome the government’s recent pension reform and the new customs code. The public is benefiting from lower inflation supported by the NBU’s monetary policy. Progress has been made in deregulation and simplifying the tax laws.

“To ensure sustainable growth and reduce financial risks, Ukraine still needs to resolve a range of important issues and deal with external and internal challenges.

“Economic growth is expected to slow this year, hurt by weaker demand for Ukraine’s exports. We project that annual growth will be 3 percent. Inflation is projected at around 7 percent for the year. We expect the current account deficit to widen to 6½ percent of GDP on current policies, though if policies are tightened the deficit could be lower.

“Ukraine has considerable external financing needs that leave it vulnerable to changes in investor sentiment. Persuading investors to support Ukraine requires policies consistent with economic stability and steady progress in implementing a reform agenda in key reform areas.

“Strengthening the fiscal position is a key government objective. The supplementary budget has increased wage and pension expenditures, and targets higher revenue collection to finance this. In order to meet the government’s 1.8 percent of GDP deficit target new measures will be needed. These could include raising tax rates for high earners, ending tax exemptions, or reducing expenditures.

“The government has set an ambitious goal to achieve energy independence. Raising gas and heating tariffs for households is an essential component of any strategy to achieve this. We recommend significant upfront tariff increases and regular increases thereafter as part of a time-bound plan to eliminate subsidies. We also recommend giving more money to the poorest households to offset their increased costs. Raising prices will lower Naftogaz’s deficit, reduce imports, and free up resources for investment in domestic production and energy efficiency.

“The monetary policy stance should continue to focus on maintaining price stability. The current monetary stance is appropriate given heightened external risks. We continue to believe greater exchange rate flexibility can better serve Ukraine in adapting to changing economic circumstances and can provide a buffer for external shocks.

“The financial sector needs to be strengthened further to help revive lending and support economic growth. The banking system appears well capitalized, but further reforms are necessary to reinforce bank balance sheets, including measures to help reduce large non-performing loans.

“We recommend ambitious reforms to improve living standards and help realize Ukraine’s economic potential. These should include building stronger public institutions and creating a better and more predictable business climate to support investment and growth.”